The cryptocurrency segment continues to be at the focus of regulatory attention. Earlier today, the Securities and Futures Commission (SFC) of Hong Kong confirmed it had taken action¬†against a number of companies active in this market segment.
In particular, following a warning about cryptocurrency risks that the SFC issued in September last year, it has sent letters to seven cryptocurrency exchanges in Hong Kong or with connections to Hong Kong. In the letters, the regulator warns the exchanges that they should not trade cryptocurrencies which are “securities” as defined in the Securities and Futures Ordinance (SFO) without a licence.
The SFC notes that most of these cryptocurrency exchanges either confirmed that they did not provide trading services for such cryptocurrencies or took immediate rectification measures, including removing relevant cryptocurrencies from their platforms. The regulator says that it may take further action where appropriate, in particular against cryptocurrency exchanges which disregard the provisions of the SFO and those which are repeat offenders.
The SFC has also written to seven ICO issuers. Most of them confirmed compliance with the SFC’s regulatory regime or immediately stopped offering tokens to Hong Kong investors. The SFC stresses that it will continue to closely monitor ICOs, and will not tolerate any violations of the securities laws of Hong Kong.
The SFC says that ICO issuers are typically assisted by market professionals such as lawyers, accountants and consultants for advice to structure the offering as utility tokens to fall outside the purview of the SFO and to circumvent the scrutiny of the SFC.
The action has been taken as investors have complained to the SFC that they were unable to withdraw fiat currencies or cryptocurrencies from their accounts opened with cryptocurrency exchanges. Some complainants claimed that cryptocurrency exchanges had misappropriated their assets or manipulated the market, or that technical breakdowns of the exchanges’ platforms caused them significant losses. Several complaints against ICO issuers alleged unlicensed or fraudulent activities.
“If investors cannot fully understand the risks of cryptocurrencies and ICOs or they are not prepared for a significant loss, they should not invest,” said Ms Julia Leung, the SFC’s Executive Director of Intermediaries.
The SFC reiterated its warnings about the increased risk of extreme price volatility, hacking and fraud when investing in cryptocurrencies and ICOs, and using services of cryptocurrency exchanges. Where these occur in an online environment, victims may have difficulty pursuing action against cryptocurrency exchanges or fraudsters to recover losses.
The SFC may not have jurisdiction over cryptocurrency exchanges and ICO issuers if they have no nexus with Hong Kong or do not provide trading services for cryptocurrencies which are “securities” or “futures contracts”. If, however, there is suspicion of fraud, the SFC is open to refer cases to the Police for investigation, the regulator explains.
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